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Federal Income Tax > Final > Flashcards

Final Flashcards

1
Q

Tax Dispute Procedure

A
  1. Thirty-day Letter from IRS
  2. Appeals Office
  3. Ninety-day Letter from IRS
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2
Q

Thirty-day Letter

A
  1. States that return was audited and taxpayer owes deficiency. Taxpayer can pay or file written protest with IRS appeals office within 30 days.
  2. If taxpayer does nothing, then statutory notice of deficiency (90-day letter) is issued and right to appeal within the IRS is lost.
  3. If written protest is filed within 30 days, case is referred to the IRS appeals office.
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3
Q

Appeals Office

A
  1. Meeting between IRS Appeals Officer and the taxpayer or his attorney.
  2. Most cases are settled at appeals level.
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4
Q

Ninety-day Letter

A
  1. Taxpayer has 90-days to file a petition with the U.S. Tax Court.
  2. If petition is not filed within the 90-days, IRS may assess the tax and there is no recourse but to pay the deficiency. After payment, taxpayer can sue for refund.
  3. If petition is filed within 90-days, the IRS cannot collect deficiency until after case is settled or Tax Court decides case.
  4. Petition must be postmarked on or before 90-days from date issued, which is indicated on the 90-day letter. No extensions are possible.
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5
Q

Statute of Limitations - Generally

A

Three years from the time the tax return was due to be filed or, if filed late, when the return was filed.

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6
Q

Statute of Limitations - Exceptions

A
  1. The IRS must mail the 90-day letter certified or registered mail, and it must be post marked before the statute of limitations expires.
  2. Three exceptions to the general rule:
    a. No return was filed
    b. Fraud
    c. Agreement to extend
  3. A greater than 25% omission of income results in an extended 6-year statute of limitations.
  4. Criminal statute of limitations is six years.
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7
Q

Court System

A

Taxpayer is permitted to choose one of three federal courts:

  1. U.S. Tax Court
  2. Federal District Courts
  3. U.S. Claims Court
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8
Q

U.S. Tax Court

A

The amount in controversy does not need to be paid until the case is settled or decided

No jury trial

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9
Q

Federal District Courts

A

Must pay tax deficiency first

Jury trials allowed

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10
Q

Gross Income (§61)

A

Gross income means all income from whatever source derived

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11
Q

Income - Defined

A
  1. Increase in wealth, and
  2. In the case of property, there must be a realization (sale or exchange of property or lucky find not integrally connected to a purchase).
  3. Can take a variety of forms: cash, property, discounts, services, free use of property, and low or interest-free loans.
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12
Q

Specified Deductions (§62)

A

Also called “Above the Line” deductions

Specified deductions are subtracted before adjusted gross income has been determined.

May be taken with Standard Deductions or Itemized Deductions

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13
Q

Itemized Deductions (§161)

A

Also called “Below the Line” deductions

Itemized deductions are subtracted after adjusted gross income has been determined.

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14
Q

Adjusted Gross Income

A

Gross Income less Exclusions, Business Deductions, and Specified Deductions

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15
Q

Taxable Income

A

Adjusted Gross Income less Itemized Deductions/Standard Deduction and Personal Exemptions

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16
Q

Credits

A

Income tax due may be reduced by certain allowable credits (Child care credits, Hope Scholarship credit, etc)

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17
Q

Taxation of Treasure Trove

A

The finder of treasure trove is in receipt of taxable income to the extent of its value in U.S. currency for the taxable year in which it is reduced to undisputed possession.

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18
Q

Taxation - Title Acquisition

A

Taxpayer has income in the year he acquires title under state law.

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19
Q

Taxation of Windfalls

A

If property is already owned before it is discovered, such as oil underground, then it is not taxable until sold.

If property not already owned is found, then the fair market value is taxable at the time of discovery (found money, diamond ring, etc.)

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20
Q

Income - Liabilities Paid by Third-Parties

A

Discharge by a third person of taxpayer’s legal obligation is equivalent to receipt of that amount by taxpayer.

Income includes indirect economic benefits.

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21
Q

Gifts & Inheritances - Generally

A

Gross Income does not include the value of property acquired by gift, bequest, devise, or inheritance.

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22
Q

Gift - Requirements

A

A gift in the statutory sense requires a detached and disinterested generosity, arising out of affection, respect, admiration, charity, or like impulses.

The most critical consideration is the transferor’s intent.

If the payment proceeds primarily from the incentive of anticipated benefit of an economic nature, it is not a gift for income tax purposes.

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23
Q

Gift Factors

A
  1. No strings attached; goodness of heart
  2. Family or other noncommercial relationship
  3. No obligation to make the transfer
  4. Made out of love and affection
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24
Q

Non-Gift Factors

A
  1. Strings attached; expecting something in return
  2. Business associate or employee
  3. Obligatory
  4. Compensation for past services
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25
Q

Tax Basis Formula

A

Amount Realized - Adjusted Basis = Taxable Gain or Loss

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26
Q

Tax Basis - Purchase

A

Tax basis is cost

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27
Q

Tax Basis - Exchange

A

Tax basis is fair market value of property received in a taxable exchange

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28
Q

Tax Basis - Gift

A

Tax basis is the donor’s basis

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29
Q

Tax Basis - Inheritance

A

Tax basis is the fair market value at the time of the decedent’s death

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30
Q

Tax Basis - Lucky Find

A

Taxable Find: Basis is the fair market value of property at the time of discovery

Non-taxable Find: Basis is cost

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31
Q

Tax Basis - Joint Tenancy

A

Basis = one-half of the basis is the value at acquisition and one-half of the basis is the fair market value at death.

32
Q

Tax Basis - Tenancy in Common

A

Same as Joint Tenancy

Basis = one-half of the basis is the value at acquisition and one-half of the basis is the fair market value at death.

33
Q

Tax Basis - Community Property

A

Basis = entire fair market value at the time of death

Survivor receives a double step-up in basis

34
Q

Personal Injury and Sickness - Generally

A

Gross Income does not include personal physical injury or sickness damages.

If there is a physical injury or physical sickness, then all compensatory damages are excluded, including lost wages.

Punitive damages are always taxable, with the exception of a few states where only punitive damages may be awarded in a wrongful death action.

35
Q

Personal Injury and Sickness - Elements

A
  1. A tort or tort-like cause of action
  2. Personal physical injury or physical sickness

Note: Emotional distress by itself is not treated as a physical injury. However, reimbursement of medical expenses attributable to emotional distress is excludable.

36
Q

Personal Injury Settlement Payments

A

A settlement payment for a personal injury claim is excludable, even if the underlying claim itself was possibly invalid.

Settlement payments attributable to the non-physical portion of the settlement, such as confidentiality or barring of future claims, is not excludable from gross income.

37
Q

Alimony - Qualifications

A

To constitute taxable/deductible alimony, the payment must satisfy all of the following:

  1. Must be in cash under a written contract. A payment in the form of property or services does not qualify.
  2. Must be received by or on behalf of the spouse or former spouse.
  3. Must be made under a divorce or separation instrument.
  4. Must not be designated in the instrument as excludable from the gross income of the recipient/non-deductible to the payer.
  5. They must not be members of the same household at the time the payment is made.
  6. There must be no obligation to make payments for any period after the death of the payee spouse.
  7. Front loading is not permitted
38
Q

Front Loading Exceptions

A
  1. Not front loading if there are at least three years of equal payments
  2. If under $15,000 per year, then not front loading in any case.
39
Q

Alimony - Tax Consequences

A

Payor: Above the line deduction

Payee: Taxable income

If payments do not qualify as alimony, then the payments are treated as a §1041 transfer between spouses

40
Q

Child Support

A
  1. Typically not deductible
  2. A payment fixed as child support in the divorce instrument is not alimony
  3. Not income to the child - treated as a gift
  4. The dependency deduction is allowed to the parent with the greater physical custody of the child during the tax year, unless the spouses have agreed otherwise.
41
Q

Property Transfers Between Spouses

A

No gain or loss on a property transfer between spouses, or ex-spouses incident to divorce.

The transfer is treated as a gift for income tax purposes, with the transferee taking the transferor’s basis.

42
Q

Property Transfers under a Pre-Nuptial Agreement

A

§1041 does not apply because the parties are not yet married.

43
Q

Discharge of Indebtedness

A
  1. Generally included in income, except in the case of discharges by a U.S. Bankruptcy Court.
  2. Discharged student loans are not taxable if the student works for a public service organization for a minimum period of time.
  3. Discharge of unpaid taxes is not taxable if the taxes are more than three years in arrears at the time of the bankruptcy filing, no fraud is involved, and the IRS did not have a prior lien on the taxpayer’s property.
44
Q

Fringe Benefits - Generally

A

There are six categories of excludable benefits:

  1. No-Additional-Cost-Service
  2. Qualified Employee Discount
  3. Working Condition Fringe
  4. De Minimis Fringe
  5. Qualified Transportation Fringe
  6. Qualified Moving Expense Reimbursement
45
Q

No-Additional-Cost-Service - Requirements

A

Must be offered for sale to customers in the ordinary course of business

Must be in the line of business that the employee is working for

The employer incurs no substantial additional cost

No discrimination in favor of highly compensated employees

46
Q

Qualified Employee Discount - Requirements

A

Services - Limited to 20% of the price at which the services are being offered by the employer to customers.

Property - Limited to not less than the purchase cost of goods to the employer.

47
Q

Kiddie Tax

A

Applies to unearned income for children under 18 years of age, or to full time students aged 19-23.

Income over the base amount is taxed to child at the parent’s rate, or the child’s rate, whichever is higher.

48
Q

Business Expense

A

A benefit to the business within a one year period.

Current business expenses are deductible in the year in which they are incurred.

49
Q

Capital Outlay

A

A benefit to the business that extends beyond one year.

A business asset with a useful life that extends beyond the year in which the expense is incurred must be capitalized.

50
Q

Business Deductions - Requirements

A
  1. Expense
  2. Ordinary
  3. Necessary
  4. Paid or incurred during the taxable year
  5. Paid or incurred in carrying on a trade or business, and
  6. No deduction for illegal bribes, fines, etc.
51
Q

Business Deductions - Ordinary

A

A cost that would be customary or expected in the life of a business. If such a cost is appropriate and helpful, it will generally be ordinary.

52
Q

Business Deductions - Necessary

A

Necessary means appropriate and helpful.

53
Q

Capital Expenditures - Costs Related to the Acquisition of Property

A
  1. Purchase price, including delivery charge and sales tax
  2. Defending or perfecting title
  3. Making an asset suitable for its intended use, or
  4. Other costs associated with acquiring an asset.
54
Q

Capital Expenditures - Outlays for the Permanent Improvement or Betterment of Existing Property

A
  1. Add substantially to the value of existing property
  2. Appreciably prolong its useful life, or
  3. Adapt property to a new or different use
55
Q

Capital Expenditures - Depreciation

A
  1. Residential rental realty - 27.5 years, straight line
  2. All other commercial realty - 39 years, straight line
  3. Personalty - 5 years for office machines, and 7 years for office furniture and fixtures
56
Q

Depreciation - §179 Depreciable Assets

A

§179 property is defined generally as depreciable tangible personal property, purchased for use in an active trade or business (does not apply towards real property).

Maximum deduction of $25,000
- Any excess deduction is carried over to the next year.

57
Q

Depreciation - Building Improvements Safe Harbor

A

A landlord may deduct the total amount paid during the year for repairs, maintenance, and improvements for a building to the lesser of $10,000 or 2% of the unadjusted basis of the building.

This limit is determined on a building by building basis.

58
Q

Capital Expenditures - Repairs & Maintenance

A

Exception to the general rule of having to capitalize any benefit to the business exceeding one year.

A repair is intended to keep a capital asset in good operating condition.

Such repairs are not capital outlays, and thus the entire cost is deductible in the year incurred.

59
Q

Passive Activities

A

A passive activity involves the conduct of any trade or business in which the taxpayer does not materially participate.

60
Q

Passive Activities - Material Participation

A

To be material, a taxpayer’s participation must be regular, continuous, and substantial.

More than 500 hours per year involvement in the business constitutes material participation.

Material participation changes any loss into non-passive losses, which are deductible against all other income.

61
Q

Passive Activities - Rental Real Estate

A

A non-real estate professional who actively participates in the activity is allowed an annual $25,000 maximum deduction against other income subject to a phase out on modified AGI above $100,000.

Active participation is relatively easy to satisfy, only requiring meeting with prospective tenants or hiring a property manager to manage the property.

62
Q

Passive Activities - Losses

A

Passive losses are deductible only against other passive income in the same year. Unused losses may be carried over to subsequent years.

63
Q

Passive Activities - Real Estate Professional

A

A real estate professional who satisfies the greater than 50% overall and 750 hours per year tests is allowed to deduct the entire passive loss against all other income.

64
Q

Interest Expenses - Qualified principal and one second home

A

Interest from a qualified principal home is fully deductible to the extent that the total secured debt does not exceed “acquisition debt” incurred in acquiring, constructing, or substantially improving any qualified residence.

There is an overal cap on acquisition debt of $1,000,000 plus an additional $100,000 for home equity debt.

65
Q

Interest Expenses - Trade or Business of Taxpayer with Material Participation

A

Fully deductible as any other business expense.

66
Q

Interest Expenses - Consumer Debt

A

No deduction allowed

67
Q

Long-term Capital Gains

A

Favorable rates apply to the sale of a capital asset owned more than one year and on qualified cash dividends on corporate stock.

68
Q

Capital Gain/Loss on Personal Assets

A

Personal assets sold at a gain are taxable as capital gains, but there are no tax benefits if the asset is sold at a loss.

69
Q

Capital Loss

A

There is an overall $3,000 cap per year on net capital losses against ordinary income with a lifetime carryover to subsequent years.

Losses carried forward can be applied against capital gains in subsequent years plus a $3,000 offset against ordinary income.

70
Q

Exclusion of Gain on Sale of Principal Residence

A

Taxpayer can exclude up to $250,000 ($500,000 for a married couple) of gain realized on the sale of a principal residence.

The taxpayer must have used the residence for at least two out of the five years before the sale, and the exclusion must not have been previously claimed within two years preceding the sale.

71
Q

Like-Kind Exchanges

A

Exchanges of property, held for productive use in business for investment purposes, qualify for tax deferred treatment.

Gains and losses from exchanges of like-kind assets are deferred.

72
Q

Like-Kind Exchanges - Delayed Exchanges

A

For delayed exchanges, taxpayer has 45 days to locate replacement property and 180 days to close on the replacement property after the date of closing of the sale of the relinquished property.

73
Q

Types of Specified Deductions

A
  1. IRA Contributions
  2. Alimony
  3. Reimbursed employee expenses
  4. Moving expenses
  5. Losses from sales of capital assets
  6. Student loan interest
74
Q

Types of Itemized Deductions

A
  1. Medical expenses (only in excess of 10% of AGI)
  2. Taxes
  3. Interest
  4. Charitable contributions
75
Q

Like-Kind Exchanges - Basis Formula

A

If gain is recognized in a like-kind exchange, the basis of the like-kind property received in the exchange is equal to:

The fair market value of the boot received
+
The gain recognized in the exchange

Federal Income Tax (1 decks)

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